Reading 61: Risks Associated with Investing in Bonds- LO

payment, required, relative, interest, discount

LOS b: Identify the relations among a bond's coupon rate, the yield required by the market, and the bond's price relative to par value (i.e., discount, premium, or equal to par).

Q1. Given that the coupon rate of a bond is higher than the market interest rate on bonds with similar maturities and payment structures, the bond will be trading:

A) at a discount.

B) at par value.

C) at a premium.

Q2. If the market rate of interest is greater than the coupon rate, the bond will be valued:

A) at par.

B) less than par.

C) greater than par.

Q3. Given that the information on the three bonds below is at issuance, which of the following choices correctly identifies the bonds as premium, par, and discount.

Bond	Market Rate	Coupon Rate
1	8.00%	7.00%
2	7.25%	7.50%
3	6.75%	6.75%

Bond 1 Bond 2 Bond 3

A) discount premium par

B) par premium discount

C) premium par discount

Q4. Gabrielle Daniels and Edin Roth, CFA candidates, are discussing the relationship between a bond’s coupon rate and the required market yield. Looking through the local newspaper, they see a new-issue, 10-year, $1,000 face value 8% semi-annual coupon bond priced at $950. Daniels makes the following statements. Which statement does Roth tell her is correct?

A) The bond is selling at a premium.

B) The bond is selling at a discount.

C) The current market required rate is less than the coupon rate.

Q5. Kirsten Thompson, CFA candidate, is studying the relationships between a bond’s coupon rate and the required market yield. One study question concerns a new-issue, 15-year, $1,000 face value 6.75% semi-annual coupon bond priced at $1,075. Which of the following choices describes the bond and the relationship of the bond’s market yield to the coupon?

A) Discount bond, required market yield is greater than 6.75%.

B) Premium bond, required market yield is greater than 6.75%.

C) Premium bond, required market yield is less than 6.75%.

Q6. Jonathon Silver, CFA, has a client, Alyce Grossberg, whose only current investment requirement is that she wants to buy a premium bond. The required market yield is currently 7.25% at all maturities. Which of the following $1,000 face value bonds should Silver select for Grossberg’s portfolio? A

A) 15-year, zero-coupon bond priced to yield 9.00%.

B) 10-year, 8.00% semi-annual coupon bond.

C) 10-year, 7.00% semi-annual coupon bond.